Food, glorious food
The world of food – from the way we think about it, purchase it and consume it – is rapidly evolving. Technological innovations and the rise of ‘disrupter’ companies are challenging existing business models, creating new, fast-growing markets. Interestingly, as we have seen in areas such as automation and healthcare, it tends to be the nimbler, tech-savvy smaller companies that are in the vanguard of this revolution. This is creating numerous company-specific opportunities for bottom-up investors like us.
Just like that!
Consider the much-loved takeaway. In the UK, diners each spent an average of £525 on takeaways in 2017, up 22% from 2007.1 This growth has been facilitated by the ubiquity of smartphones/tablets and digital intermediaries, such as foodpanda, Hungry House and One Delivery. Through these, time-pressed consumers can dispense with their myriad takeaway menus and instead order their favourite meals with the click of a button.
One company that has been particularly successful in this space is Just Eat. Started in Denmark in 2000, it now has operations in over 15 countries, including the UK. Competition is fierce, but Just Eat benefits from its first-mover advantage, scale, breadth of food options and effective marketing. It also continues to develop new technology designed to keep its clients engaged. This includes a soon-to-be-launched Ordering Wand, which will allow customers to summon their favourite food with a flick of the wrist.
On yer bike
Then there are third-party couriers, such as Deliveroo, Jinn and UberEATS. This more physically active approach to food delivery allows consumers to order meals from their favourite service-only restaurants without having to leave the comfort of their home. Again, this is a booming sector, with a 118% growth in home delivery sales in 2015.2
A slice of the action
The response from traditional incumbents to these ‘disrupter’ companies has also been striking, notably from Domino’s Pizza. Taking its cue from the likes of Uber and Airbnb, Domino’s transformed itself by “thinking like a technology company”. This saw it reposition its image away from a pizza delivery firm to one that provides “digital-first mealtime solutions”. As part of this strategy, its advertising changed from promoting pizza deals towards catering for specific, relatable occasions, such as a Saturday night with friends. It also made the ordering experience more interactive, including the launch of ‘Dom’, a device that lets consumers track their pizza from the oven to the door on their smartphones or Apple Watch. This success has been significant, with total sales up 80% since 2010, and ecommerce increasing 432% over the same time.3
Surprisingly, given the size of the takeout industry in the US (nearly $245 billion in 2016), adoption of online ordering has been relatively slow. For example, of the $75 billion spent on takeouts from independent restaurants (i.e. non-franchise outlets), only $5.9 billion was transacted online (a penetration rate of 7.8%).4 This is because the US independent market is hyper-local and fragmented, dominated by owner-operated family businesses with limited resources to invest in online ordering platforms – and that’s where companies such as GrubHub come in.
Thanks to its scale, recognised brand and unrivalled tech platform, it is able to connect thousands of independent food outlets across the US with nearly 10 million customers. This strategy is working: last year it filled an average of 300 orders per minute, with revenues up 49% and net income increased 100%. The outlook for GrubHub looks particularly appetising: it recently announced a tie-up with Yum! Brands (owner of KFC and Taco Bell), markedly increasing the company’s restaurant partnerships from its current 75,000 outlets. Its shares climbed a whopping 30% on the news.
Of course, innovation does not always come in the guise of technological advancement. Two companies that changed their respective industries did so by focusing on the quality and provenance of the goods they produce. However, like their takeaway equivalents, these companies understood the importance of brand and the need to consolidate first-mover advantage. The firms in question are Fever-Tree and Wessanen.
Born from modest beginnings in 2004, Fever-Tree quickly established itself in the UK’s premium mixer market, creating a new sub-category in a space previously dominated by Schweppes. Fever-Tree’s use of all-natural ingredients and creative sales and marketing have led to rapid growth, aided by the resurgence of gin as a popular drink and consumers who are looking to drink “better not more”. The company has also expanded internationally, with 61% of revenues now coming from outside the UK. Combined, these resulted in analyst-beating revenues of 77% in the first-half of 2017.5 Importantly, Fever-Tree continues to develop products and cater for new consumers. An example of this is the dark spirits market in the US, where Fever-Tree is set to launch Madagascan cola and premier ginger ale later this year. Fever-Tree’s shares are up over 1,600% since listing four years ago.
A clean bill of health
Perhaps one of the boldest revolutions comes from a relatively ‘old’ food company – Holland’s Wessanen. After 250 years as a generalist producer, the company transformed at the turn of the millennium by selling its snack/drinks businesses and focusing instead on health foods, including promoting sustainable production and consumption. So much so that 96% of revenues are now vegan or vegetarian.6 It hasn’t been a smooth journey, with lack of awareness among consumers being an issue. However, Wessanen has sought to address this through consistent communication – its mantra is “Healthier Food - Healthier People - Healthier Planet” – and invention, notably by developing milk and meat alternatives.
A tasty future
For many years, investors traditionally viewed food and beverage companies as relatively low growth, slow moving businesses (think Diageo, Nestle, etc.). No more. As we have seen, there are numerous examples of innovative, nimble smaller companies that can open up new markets and quickly take advantage of changes in consumer behaviour. Our job as investors is to apply our rigorous bottom-up process, seeking to discover the larger companies of tomorrow – today.
“There has never been a greater need to change the world of food” Wessanen7
1https://www.scunthorpetelegraph.co.uk/news/uk-world-news/ten-things-spend-much-more-1097455 Office for National Statistics £525
4US fastfood stats: https://www.statista.com/topics/863/fast-food/
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